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The 2020-21 Budget: Reinventing the Department of Business Oversight

The Legislative Analyst’s Office has just published the following report:

The 2020-21 Budget: Reinventing the Department of Business Oversight

Governor’s Proposal. The Governor proposes budget trailer legislation to make various changes related to the Department of Business Oversight, such as changing its name to the Department of Financial Protection and Innovation (DFPI), providing it with authority to take enforcement actions against financial service providers for unfair, deceptive, or abusive acts or practices (UDAAPs) violations and register providers of consumer financial services.

Under the proposal, the department’s two main funds would be merged to form a new fund—the Financial Protection Fund (FPF)—and the regulation of industrial banks would be modified. The Governor’s budget proposes $10.2 million from FPF and 44 positions in 2020-21, increasing to $19.3 million annually and 90 positions in 2022-23 to support DFPI’s implementation of these changes and related activities.

Assessment. The concept of improving consumer protection related to financial products and services has merit. However, the Governor’s proposal raises several key questions related to the (1) appropriate role for DFPI, (2) preferred approach to funding DFPI and its new proposed activities, (3) regulation of industrial banks, and (4) process that should be used for making policy choices.

We also find that the specific choices the Legislature makes could affect the amount and timing of the funding needed by the department. Finally, we find that the Governor’s proposed funding approach fails to acknowledge key uncertainties, such as the level of workload associated with the various proposed new activities.

Recommendations. We recommend that the Legislature consider the Governor’s proposed statutory changes through the legislative policy process. This would allow the changes to be vetted by the policy committees that have expertise on the specific issues that are raised. In addition, this would better position the Legislature to determine which policies should be established in statute and which could be left to the regulatory process. To the extent the Legislature allows DFPI to use the regulatory process, we recommend that the Legislature not authorize the department to use the emergency regulation process.

Depending on the choices the Legislature makes, we recommend it adjust the funding it provides accordingly. Regardless of its choices, we recommend that the Legislature take a more incremental approach to providing funding for DFPI. In particular, we recommend that the Legislature reject the funding requested for positions that are not needed in the budget year, and that the Legislature fund some activities on a limited-term, pilot basis. This more incremental approach would improve legislative oversight over DFPI and ensure that it is appropriately resourced for its new responsibilities.

This report is available using the following link: https://lao.ca.gov/Publications/Report/4181

This article was released by the California Legislative Analyst’s Office.